In Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb, the question of which law governed the validity and scope of an arbitration agreement arose before any arbitration had taken place. Then, in the UK Supreme Court judgment of Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) given on 17 October 2021, a similar issue arose in the post-arbitration phase where the UK Supreme Court was to decide on the enforcement of an award made by the arbitral tribunal. Confirming the approach in Enka, the UK Supreme Court held that, as a matter of English law, an express choice of law to govern the contract as a whole “will normally be a sufficient ‘indication’ of the law of arbitration agreement.”
Kabab-Ji (the claimant in the ICC arbitration, appellant before the UK Supreme Court), is a Lebanese company specialising in Lebanese cuisine and owns trademarks underpinning its unique restaurant concept. Through a Franchise Development Agreement (the “FDA”), Kabab-Ji granted a licence to a Kuwaiti company in July 2001, Al Homaizi Foodstuff Company (“Al Homaizi”) to operate a franchise using its restaurant concept in Kuwait for a period of ten years. Under the FDA, Kabab-Ji SAL and Al Homaizi subsequently entered into a total of ten Franchise Outlet Agreements (“FOAs”) in respect of individual outlets opened in Kuwait. The FDA and FOAs (collectively the “Franchise Agreements”) were all expressly governed by English law. The Franchise Agreements also provided for ICC arbitration seated in Paris, France.
In 2005, the Al Homaizi Group underwent a corporate restructuring. A new entity named Kout Food Group (“KFG”) was formed and Al Homaizi became a subsidiary of KFG. KFG was the respondent to the ICC arbitration and before the UK Supreme Court.
When a dispute arose under the Franchise Agreements, Kabab-Ji commenced ICC arbitration against KFG alone. KFG participated in the arbitration but maintained that it was not a party to the Franchise Agreements nor the arbitration agreements they contained.
The Issues Before the Supreme Court
As in Enka, the first question that arose was to identify which system of law the English court must apply to decide whether there was an enforceable arbitration agreement. Here, if it were correct that the parties made an express choice of English law, and not an implied choice of French law as governing their arbitration agreement, two further issues arose. One is whether, as a matter of English law, the defendant never became a party to the arbitration agreement. The other is whether, procedurally, the UK Court of Appeal was right to have decided that question and given summary judgment refusing enforcement of the award.
Focusing on the first question, which is of most practical consequence for arbitration users, the Supreme Court followed the decision in Enka and found that the law governing the question of whether KFG became a party to the arbitration agreement was English law.
The Relevant Contractual Clauses
The relevant clauses of the FDA were as follows:
Article 1: Content of the Agreement
This Agreement consists of the foregoing paragraphs, the terms of agreement set forth herein below, the documents stated in it, and any effective Exhibit(s), Schedule(s) or Amendment(s) to the Agreement or to its attachments which shall be signed later on by both Parties. It shall be construed as a whole and each of the documents mentioned is to be regarded as an integral part of this Agreement and shall be interpreted as complementing the others. Article 14: Settlement of Disputes
14.2. Except for those matters which specifically involve the Mark, any dispute, controversy or claim between LICENSOR and LICENSEE with respect to any issue arising out of or relating to this Agreement or the breach thereof, […] shall, failing amicable settlement, on request of LICENSOR or LICENSEE, be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.
14.3. The arbitrator(s) shall apply the provisions contained in the Agreement. The arbitrator(s) shall also apply principles of law generally recognised in international transactions. The arbitrator(s) may have to take into consideration some mandatory provisions of some countries ie provisions that appear later on to have an influence on the Agreement. Under no circumstances shall the arbitrator(s) apply any rule(s) that contradict(s) the strict wording of the Agreement.
14.5. The arbitration shall be conducted in the English language, in Paris, France.
Article 15: Governing Law This Agreement shall be governed by and construed in accordance with the laws of England.
The Supreme Court’s Reasoning on the Applicable Law of the Arbitration Agreement
The UK Supreme Court held that clause 15 of the FDA providing that “this Agreement” shall be governed by the laws of England was ordinarily and reasonably understood to denote all the clauses incorporated in the contractual document, including clause 14. This evidenced that the parties did not intend to exclude the arbitration agreement from their choice of English law to govern all the terms of their contract, including the arbitration agreement.
The Court further opined that any room for doubt about the meaning of clause 15 had been vindicated by clause 1, which stated “[t]his Agreement consists of … the terms of agreement set forth herein below”. The “terms of agreement set forth herein below” manifestly included clause 14. It was therefore held that there was “no good reason to infer that the parties intended to except clause 14 from their choice of English law to govern all the terms of their contract”.
Application of the Statutory Regime – Article V(1)(a) New York Convention 1958
Recalling that the case before the Court was in the context of an appeal from an application for enforcement, the relevant statutory regime applicable was Article V(1)(a) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards as enacted in Section 103(2)(b) of the 1996 Arbitration Act. Section 103(2)(b) states:
(2) Recognition or enforcement of the award may be refused if the person against whom it is invoked proves –
(b) that the arbitration agreement was not valid under the law to which the parties subjected it or, failing any indication thereon, under the law of the country where the award was made;
The Court distilled the article into two parts: (i) a “primary rule” according to which the validity of the arbitration agreement is governed by the law chosen by the parties and (ii) a “default rule” where no choice has been indicated, according to which the validity of the arbitration agreement is governed by the law of the country where the award was made (deemed to be the place of the seat).
As in Enka, the Court noted that, under Article V(1)(a), it is only if there is no “indication” of a chosen law should there be recourse to the seat as the law of the arbitration agreement. A general choice of law clause in a written contract (such as the choice of English law in the Franchise Agreements) would normally be a sufficient “indication” of the law to which the parties had subjected the arbitration agreement.
UNIDROIT Principles of International Commercial Contracts Has No Effect on the Arbitration Agreement
The Court further dismissed the claimant’s argument based on the UNIDROIT Principles leading to its erroneous conclusion that in the absence of a sufficient indication of the law which is to govern the validity of the arbitration agreement, it would be necessary to fall back on the default rule that the applicable law is that of the seat of the arbitration, i.e., France. This argument stemmed from clause 14.3 of the FDA, providing “the arbitrator(s) shall also apply principles of law generally recognised in international transactions”. The parties agreed that this was to be understood as a reference to the UNIDROIT Principles of International Commercial Contracts, a set of principles formulated by international scholars and published by an intergovernmental organisation.
The Court held that these principles only bound the arbitrators in addressing the merits of the dispute and had no effect on the arbitration agreement. The Court, assuming (but not deciding) that a “law” (in article V(1)(a) of the Convention and section 103(2)(b) of the 1996 Act) should be restricted to the law of a country, considered that the law to be applied would consist of the system of national law selected by the parties without regard to the UNIDROIT Principles.
The Supreme Court therefore upheld the Court of Appeal’s decision, finding that English law governed the arbitration agreement and therefore applied to the question of its validity. Under English law, KFG had not become a party to the FDAs and, therefore, the arbitration agreement could not extend to KFG. As a result, the Supreme Court refused the recognition and enforcement of the ICC award.
Key Takeaways for Arbitration Users
- Parties should specify expressly in contracts the law applicable to the arbitration agreement in addition to the law governing substantive obligations under the contract to avoid uncertainty in the enforcement stage.
- Where the governing law of a contract is incongruent with other soft law incorporated into the contract, such as the UNIDROIT Principles, the governing law will prevail.
- English law gives paramount priority to the parties’ bargains as reflected in their written agreement and continues to be a consistent source of law. By enforcing the express terms of the contract, including (i) its choice of law provisions to determine the law of the arbitration agreement, (ii) a “no oral modification” clause, and (iii) a prohibition on the transfer of contractual rights and limitations on waiver, the Court ultimately affirmed, as a matter of English law, that KFG could not have become a party to the arbitration agreement in the FDA.